Ginnie Mae beats Texas Capital Bank's HECM lawsuit

A judge has dismissed Texas Capital Bank's federal lawsuit against Ginnie Mae over mortgage assets, a ruling the bank said could have a "chilling effect" on the industry. 

U.S. District Judge Matthew Kacsmaryk on Wednesday granted Ginnie's motion for summary judgment in the case the bank filed in October 2023. TCB sparred with the government over $28 million in Home Equity Conversion Mortgage proceeds the lender argued it was entitled to in the fallout of Reverse Mortgage Funding's 2022 filing for Chapter 11 bankruptcy protection. 

The case focuses on "tails," or borrowers' subsequent draws on HECMs. Following RMF's bankruptcy, TCB agreed to loan RMF debtor-in-possession financing, in exchange for taking a first-priority lien on the specific HECM collateral. Ginnie later extinguished that lien, and TCB sued the government for tortious interference and for violating the Administrative Procedure Act. 

Kacsmaryk, a 2019 Trump appointee, issued his judgment in a Texas federal court with prejudice, meaning the case cannot be refiled. TCB in a statement Thursday said it would appeal the ruling, and suggested "the entire industry should be alarmed" at Ginnie's alleged unlawful seizure of collateral. 

"Should Ginnie Mae's egregious actions be allowed to stand, it will have consequences far beyond this case, most seriously, the chilling effect on the industry, including the ability and willingness of Texas Capital and others to participate in programs like this one," the statement read. 

The company also said the victims of Ginnie's actions would be seniors relying on reverse mortgages to pay basic expenses. Representatives for Ginnie Mae didn't respond to requests for comment, while an attorney for the government referred inquiries to the Department of Justice. 

The Texas judge, in a 14-page memorandum opinion and order, cited federal statute in weighing the complex argument between the sides over whether HECM tails were distinct from those loans' initial participations. Tails, he explained, are simply a portion of a HECM loan not securitized into a pool even though its other parts are.

Congress granted Ginnie extinguishment power over mortgages, and lawmakers did not specify "participations that constitute the trust or pool," wrote Kacsmaryk.

"The court interprets (Ginnie Mae's) extinguishment power to extend to such mortgages and declines to divvy up those mortgages into smaller units if Congress did not," he said. 

That reasoning led Kacsmaryk to toss the APA claim, in which courts can rule against agency actions it deems unlawful or in excess of their jurisdiction. TCB's tortious interference claim also failed because Ginnie's actions had a legal excuse. 

"The relevant unit is 'mortgage'—not portions of mortgages," wrote Kacsmaryk. "The court appreciates TCB's frustration with this power."

He referenced a report by a retained TCB expert, which described RMF leaders in emails calling the Ginnie tails arrangement infuriating to TCB, and "really effed up."

The Department of Housing and Urban Development's Inspector General in late 2023 said it was launching an investigation into Ginnie's handling of RMF's bankruptcy, but hasn't since provided formal updates.